A bond at a discount has the benefit of increasing to face value. Moreover, the impact of a discount is greatly influenced by the time until maturity. In December 2015, one could have purchased, in December 2015, the Freeport McMoRan 2.3% Notes due November 2017, essentially 2-year paper, at $85. Therefore, aside from the current yield of 2.7%, the mere solvency of Freeport would provide another 17% points of return (or 8.5% per year).

Why the opportunity? Freeport McMoRan, one of the major global copper and gold miners, as well as an oil producer, was facing distress due to the collapse in commodities prices. The credit rating agencies indicated their intention to downgrade the company’s debt to junk status. Among the natural (and price-insensitive) sellers of a bond that will lose its investment grade status are index funds, simply as matter of their charter.

Undoubtedly, the safety of the company’s longer-term bonds was more debatable, but in practical terms the maturity date made a difference. An indication of the company’s strength was that Freeport was freely issuing new debt in order to refinance existing debt, extending the maturities of bank lines of credit, selling shares to certain trade counterparties, and pursuing asset sales in order to ensure balance sheet liquidity. Freeport is a large company, with a very large and diverse hard asset portfolio to work with. These 2.3% Notes were among the first maturities to come due and would therefore be a priority for repayment. Accordingly, this 2-year bond had a great deal of visibility relative to assets and cash flow; that could not be had for, say, 10-year bonds.

In fact, by May 2016, Freeport had raised several billion dollars of liquidity, and the 2.3% Notes traded within a couple of points of 100.


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